Lecture slides for the “Can Government Help?” section of my Social Issues in America course:
Is there a tradeoff between social justice and a healthy economy?
Archive for the 'Living standards' Category
Prosperity in America
March 8, 2010Lecture slides for the “Prosperity in America” section of my Social Issues in America course this semester:
Flourishing in a sea of information
November 5, 2009Life is getting much better in an important respect. That’s the message of Tyler Cowen’s book Create Your Own Economy. The gain is in personal enjoyment. The driver is new information and communication technology.
At the center of this is the internet, which gives us access to much more information, and more quickly and cheaply. What about information overload? Doesn’t the resulting sense of bewilderment and paralysis offset, and for some even outweigh, the benefit?
Cowen says no, because we have new ways to control the flow of information. Internet search engines let us target the particular information we want. RSS feeds allow us to focus on the websites that most interest us.
The same holds for music, books, movies, television shows, sporting events, and other types of entertainment. From iTunes you can purchase individual songs rather than entire albums. With an iPod you can then listen to those songs in a sequence of your choosing at whatever time and place you like. Kindle-type devices allow virtually instant purchasing of books and the ease of reading them whenever and wherever you please. DVRs, online rental services, and on-demand television make it possible to borrow or record movies and TV shows and watch them when it’s convenient.
Technological advances also enhance our control over communication. A telephone conversation occurs at the convenience of the caller, whereas email and texting allow you to receive inputs when it suits you. They also permit you to reflect a bit before you respond. With Facebook, chat rooms, blogs, and Twitter you can move in and out of ongoing conversations at will.
Imposing order on information is psychologically satisfying. The increase in our ability to control the amount, the content, and the timing of information and entertainment we consume may be just as valuable, in terms of our well-being, as the increase in the amount of information to which we have access.
The benefit varies across individuals. Enhanced ability to organize information is particularly valuable to people with a cognitive style that prizes order. For some of us more than for others, exerting control over the flow of information is pleasing. Greater access to information and culture is especially valuable to those with narrow and atypical interests. If you want to know a little about current political debates and what celebrities are up to, you may be able to get your fill by reading a daily newspaper or Time magazine or by watching a half-hour network news program. But if your interests are less mainstream — say, soccer in Argentina or west African music or Asian architecture — the internet makes a huge difference.
Autistics tend to be on the extreme end of both of these continuums; they often find the organization of information highly satisfying, and they tend to have narrow and unusual interests. Advances in information and communication technology are therefore likely to enhance the enjoyment of autistics to an even greater degree than of others. This, according to Cowen, suggests heightened potential for autistics, and people with similar if less extreme cognitive traits, to have a rich life experience.
Create Your Own Economy is well worth reading. Cowen’s case for optimism about the contribution of new technologies to individual well-being is stimulating and fairly compelling. The writing is engaging, and the book is more coherent than a few of the reviews I’ve seen led me to expect (and which I half-expected anyway based on the style of Cowen’s blog).
I wish Cowen had pushed further on two issues.
First, his assessment of the prospects for autistics focuses on consumption. But there’s also the matter of how to make a living.
Cowen rightly notes that autistics tend to have cognitive strengths in matters that interest them: keen perception of details and patterns, an ability to focus clearly, and a capacity to effectively store and organize information. For autistic individuals this cognitive profile may serve as a comparative advantage in a world in which production and analysis of information dominates the production of things. Cowen spends some time discussing the successes and contributions of famous innovators and thinkers and writers who may have been autistic, from Thomas Jefferson to Immanuel Kant to Arthur Conan Doyle.
But what about the earning prospects of less extraordinary autistics? Autistics tend to have a range of impediments to effective social functioning: they may read social cues poorly, lack interest in non-instrumental conversation, get easily distracted, react to imperfection or irregularity with extreme frustration, have strong sensory aversions, engage in odd repetitive motions, and some don’t develop the ability to speak. Cowen is certainly aware of the barriers these impose, and at one point he says “if you take [autistic] abilities and disabilities and stick them into a rapidly evolving market economy, you will get some people who achieve relatively high social status and other people — many others — who end up with much lower status” (p. 21). But he says little more about this.
In the book’s final chapter Cowen writes:
You may know that the division of labor is a key idea in Adam Smith’s Wealth of Nations. Smith’s notion of the division of labor referred to increasing specialization in economic production. He gives the example, from a pin factory, of how each worker performs a very specific and repetitive task in the interests of greater productivity for the factory as a whole.
It’s not what Smith intended, but I read this discussion of the pin factory as a parable of autism and the rising returns to autistic cognitive strengths. If you can perform a repetitive task with the proper skills, you can earn a decent income because you are no longer expected to be a jack-of-all-trades or to master a wide variety of skills. It increases the chance that you can have a “dysfunction” and still do well in life and in your career…. Today it’s often enough to be very good at one specific professional task. In other words, the division of labor provides disproportionate benefits to people with specialized cognitive talents and that includes many people along the autism spectrum. (pp. 215-16)
I think there may be something to this, but it strikes me as a pretty thin reed on which to hang an optimistic conclusion. I want to hear more.
Throughout the book Cowen argues for greater appreciation of neurodiversity. Partly this involves recognition that autistic traits are part of a continuum; they differ in degree rather than in kind. It also means we should pay better attention to the cognitive strengths of autistics.
That would be a good thing, but surely more is needed. Early diagnosis and intervention are now widely agreed to be critical. So too are teachers and aides in K-12 schools who foster social development in autistic children without stifling their interests and skills. Less discussed but potentially very helpful is an ongoing shift toward individualization in the administration of government benefit and service provision. Citizens and policy makers in the United States and many western European nations have increasingly wished to encourage employment by able working-age adults. A key lesson from their efforts to do so is that incentives are useful but often insufficient. If you want people to work, it helps to facilitate that with individualized assistance and monitoring. Individualization gives caseworkers better information about what types of help — at-home support, financial assistance, training, job placement, transportation, and so on — are likely to be of greatest benefit. To maximize opportunities for autistics, and to ensure the best possible utilization of their skills and strengths, we need not only the wider appreciation of neurodiversity that Cowen commendably encourages but also a helping hand from the state.
Second, I wish Cowen had addressed the worry that creating your own prosperity will come at the expense of the greater good. Specifically, the internet and other individualized forms of information sharing and communication might hasten the erosion of social capital. Researchers have found links between social capital and economic and political health (though these associations and their magnitudes are by no means a settled issue). If we spend more and more of our time glued to our RSS feeds, iPods, Kindles, and on-demand movies, will we engage less in human interaction, communication, and participation in social groups and activities? Are we heading toward a future of browsing, listening, reading, and viewing alone, bereft of face-to-face connections and civic engagement?
Maybe. But the new technologies might help to offset any such loss. For one thing, they enable us to identify and interact with a better-targeted set of compatriots. We now have fewer widely shared if shallow experiences, such as attending PTA or Elks Club meetings. They may be replaced by more fulfilling ones shared with smaller groups: interacting in a Facebook friend network or an online chat group, emailing or instant messaging with people who you’ll never meet in person but who share your particular passion.
By allowing us to locate other people with similar interests, new information and communication devices also help us to feel connected in a way that, for some, may not have been possible before. Attending church or a committee meeting can be highly interactive for some people. But others may experience them as boring or even alienating. For the latter, reading Facebook or blog or Twitter posts may create a greater sense of connection, of belonging, of membership, of community.
The internet and new communication technologies also make it easier for some people to actively contribute. A person who sits silently in the back of a PTA meeting might experience more engagement and efficacy by writing a blog post, commenting on someone else’s post, editing a Wikipedia entry, reviewing a book, posting photos, or participating in a chat room dialogue.
Perhaps, then, we’re moving toward not less social capital but simply a different form — more fulfilling to some of us and no less useful for sustaining a healthy society.
Presidents and Income Inequality
December 9, 2008With an incoming Democratic president, should we expect some reversal of the rise in income inequality that has characterized much of the past generation? The following chart, from Larry Bartels’ book Unequal Democracy, suggests reason for optimism. Using Census Bureau data covering the period from 1948 to 2005, Bartels finds a much more egalitarian pattern of income growth under Democratic presidents than under Republican ones.
Bartels’ book is social science at its best: careful empirical research on questions at the forefront of current political and policy debate. His finding of a strong association between president’s party and income inequality is just one of the many interesting and important ones in Unequal Democracy.
That finding seems to have become accepted as an empirical fact by economic and political commentators. A sampling: Dan Balz, Alan Blinder, Tyler Cowen, Kevin Drum, Andrew Gelman, Ezra Klein, Paul Krugman, Andrew Leigh, Brendan Nyhan, Dani Rodrik, Theda Skocpol, Michael Tomasky, Will Wilkinson, Matthew Yglesias, Julian Zelizer.
Is it correct? The story struck me as convincing for the period through the end of the 1970s, but less so for the years since then. So I went to the data. Here’s a summary of my conclusions:
Bartels’ account of the first portion of the post-World War II era seems to me compelling. From the late 1940s through the 1970s, Democratic and Republican presidents tended to have sharply contrasting fiscal and monetary policy orientations. This difference in policies appears to have contributed to sizable differences in income growth for families at various points in the income distribution. Families near the top tended to do equally well irrespective of the president’s party, but families in the bottom 80% fared better under Democrats. Income inequality in the United States changed little over the period as a whole, as increases under Republican presidents were balanced by declines under Democratic presidents.
Since the 1970s the story has been very different. Income inequality has risen sharply, and the correlation between president’s party and movement in inequality has been much weaker.
If we focus on the bottom 95% of the income distribution, as Bartels does, we observe a notable partisan difference in inequality trends and in patterns of income growth in the lower half of the distribution during this period. Contrary to Bartels’ conclusion, this partisan difference exists mainly for pretransfer-pretax income, suggesting that transfer and/or tax policy differences have not been a key driver. To the extent presidents have mattered, the effect seems more likely to have operated via union strength and/or the minimum wage.
To fully understand post-1970s trends in income inequality in the United States, it is critical to include developments at the top of the distribution, which Bartels does not do. If we turn to data that include the top 1%, we find only a weak association between president’s party and changes in inequality since the 1970s. Republican and Democratic presidents have pursued contrasting tax policies, and those policies appear to have made a difference for inequality. But their impact has been swamped by trends in pretax income. At the moment we know relatively little about the factors driving the dramatic increase in the share of economic growth going to those at the top of the distribution, and even less about what role presidents have played.
The following chart is, I think, the best representation of what’s happened since the late 1970s:
The full paper is here.
Are you better off now than you were eight years ago?
September 27, 2008Slow Income Growth for Middle America
September 3, 2008The economic challenges and strains facing middle-class Americans are likely to get a good bit of attention between now and election day, at least from the Obama campaign. They include sluggish income growth, heightened financial insecurity, rising health care and college costs, and falling home values. Each of these is important, but the most critical in my view is slow growth of incomes.
The following chart tells the story. It shows inflation-adjusted GDP per capita and median family income from 1947 (the earliest year for which the income data are available) to 2007. To facilitate comparison of the over-time trends, each is indexed to its 1973 level. Since the mid-to-late 1970s, growth of income at the median has been slow — very slow — relative to growth of the economy. The current decade, with no improvement at all in median income, is especially striking.
The dashed line in the next chart shows what median income would have looked like had it risen in sync with per capita GDP. The difference is huge: in 2007, the median family’s income would have been $91,000 instead of $61,000.
Various excuses and rationalizations have been offered: It’s okay because Americans now get more in employer benefits instead of in their paycheck. Family size has shrunk, so slow income growth isn’t a big deal. A lot of those in the bottom half are immigrants, and even with slow income growth they’re better off than they would have been in their native country. None of these is compelling (see here or here).
The disconnect between economic growth and middle-class income growth is due largely to rising inequality. In the past several decades much of the economy’s growth has gone to those at the top of the income distribution.
Faster income growth wouldn’t render other middle-class strains irrelevant. But it would help.
Jobs with Equality
July 31, 2008My new book is titled Jobs with Equality. It’s available from Oxford University Press (the publisher), Amazon, Barnes and Noble, and others.
I’ve put the introductory chapter online.
Here’s a summary:
Income inequality has been rising in many of the world’s affluent countries, due to a variety of economic and social shifts. Redistribution can help, but government revenues are threatened by globalization and population aging. Like a growing number of observers, I see an increase in the employment rate as a way out of this impasse; it enlarges the tax base, allowing tax revenues to rise without an increase in tax rates. The question is: Can egalitarian institutions and policies be coupled with employment growth?
In the book I assess the experiences of rich nations since the late 1970s. I examine the impact on employment of six key policies and institutions: wage levels at the low end of the labor market, employment protection regulations, government benefit generosity, taxes, skills, and women-friendly policies.
It turns out that there is no parsimonious set of institutions and policies that have been key to good (or bad) employment performance. The comparative experience features multiple paths to employment success, including low-inequality ones. This suggests reason for optimism about possibilities for a high-employment, high-equality society.
Cover blurbs:
“This new book is a worthy successor to Lane Kenworthy’s much-acclaimed Egalitarian Capitalism. Combining academic rigor with a reader-friendly style, he explores how we might reconcile what many consider incompatible goals: more employment and greater equality. Drawing on systematic and empirically rich analyses, Kenworthy argues against any simplistic policy formula. The book makes especially lucrative reading when, in the latter half, it identifies the key ingredients of a win-win strategy. Jobs with Equality is destined to generate debate, all-the-while that it affirms Lane Kenworthy’s status as a leading scholar of social inequality.” — Gøsta Esping-Andersen, Universitat Pompeu Fabra
“On the premise that high employment is essential to the realization of egalitarian goals in the contemporary era, this important book explores how social policies and institutional arrangements in advanced capitalist societies have affected employment growth over the last three decades. Kenworthy synthesizes existing literature and presents new empirical findings based on original cross-national data and measurements. His most important contribution is to explore multiple determinants of employment performance and interactions among these determinants in systematic fashion. Very sensibly, the analysis yields policy recommendations that are specific by institutional context. For students of comparative political economy, the particular questions that Kenworthy addresses are now settled for some time to come.” — Jonas Pontusson, Princeton University
Chapter list:
1. Introduction
PART I EQUALITY
2. Why Should We Care About Inequality?
3. Sources of Equality and Inequality: Wages, Jobs, Households, and Redistribution
PART II JOBS
4. Measuring and Analyzing Employment Performance
5. Low-End Wages
6. Employment Protection Regulations
7. Government Benefits
8. Taxes
9. Skills
10. Women-Friendly Policies
11. Toward a High-Employment, High-Equality Society
Rising Inequality Hinders Upward Mobility
July 27, 2008We expect that each generation of Americans will have higher incomes than preceding ones — that, in other words, there will be upward absolute intergenerational mobility. Data from a report by the Economic Mobility Project suggest some reason for concern.
The data are for various generations of families with a man in his thirties, thereby holding stage of the work career constant. The question is how much family income (adjusted for inflation) increases across generations, with a generation defined as 30 years. As the following chart shows, the median income of these families increased by about $12,000 between 1964 and 1994. Between 1974 and 2004, in contrast, it increased by only $4,500. The gain from generation to generation declined. And this is despite the fact that a growing share of these families have two earners rather than just one.
This could be because economic growth slowed. Or it could be due to rising inequality; a larger and larger share of the economy’s growth has gone to families at the high end of the distribution and less and less of it to the rest.
The second chart here suggests that rising inequality may have been more important than slow economic growth. From 1964 to 1994, the average annual growth rate of GDP per capita was 2.2% and the growth rate of median income for families with a man in his thirties was 0.9%. From 1974 to 2004, GDP per capita grew at an annual rate of 2.0% while median income for families with a man in his thirties grew at 0.3%. The drop in income growth across generations was much sharper than the drop in growth of the economy.
Upward mobility is a key element of the American ethos. Slowing inequality’s march would help (more here and here).
Making Ends Meet on $300,000 a Year
June 24, 2008BusinessWeek‘s June 16 issue has a story on the “not-so-rich” rich. It asks “Just what does it mean to be wealthy these days? … Many facing higher taxes [if Barack Obama is elected president] don’t consider themselves part of the exalted crowd. They have good incomes, to be sure, particularly compared with the median household income of $48,200. Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.” The article goes on to cite comments by a few others in this income range who say they feel “stretched” and “middle class at best.”
It would help to have a sense of what a household budget at this income level might look like. Here’s an attempt at one. I assume two employed adults and two preschool-age children. I use a pretax income of $300,000, which comes to $25,000 a month.
A lot of this — loan payments, property taxes, savings, child care expenses, and others — will vary depending on household circumstances. But are there any significant errors or omissions here?
Calculations by the Tax Policy Center suggest that Obama’s plan would increase taxes for this type of family by perhaps $6,000 a year, or $500 per month (about 2% of pretax income). Is that too much to ask? You be the judge.
Measuring Living Standards: The Family Road Trip
June 6, 2008For many American households, incomes have been stagnant over the past generation. But (lack of) change in incomes isn’t necessarily a good indicator of change in living standards.
On the one hand, as Elizabeth Warren and others have pointed out, the cost of some key middle-class consumption items — housing, health care, and college — has increased much more rapidly than the consumer price index. And inflation-adjusted income data don’t capture important aspects of quality of life such as commuting time, work stress, and crime, which have gotten worse for some people over the past several decades.
On the other hand, income data also fail to capture many ways in which living standards have improved. Consider the quintessential American middle-class summer ritual: the family road trip. In 1974 my parents drove us from Atlanta, where I grew up, to Phoenix, where one set of grandparents lived. My wife and kids and I have just done the reverse, driving from our home in Tucson to Atlanta to visit my parents and siblings.
Some things haven’t changed: You still get in an automobile and drive 1800 miles over three(ish) days. Food at most freeway exits isn’t much different than it was a generation ago; Subways have replaced Stuckeys, but McDonalds, Burger King, and Dairy Queen are still the chief options, and their menus still feature mainly burger-fries-soda. It’s a far cry from the Italian Autogrill.
One thing has gotten worse: Gas is, at the moment, almost twice as expensive as in 1974.
Yet there are a host of ways in which the family road trip has gotten better:
In 1974 my parents drove a Chevy station wagon. We now drive a Toyota minivan. Toyotas, largely unknown to Americans prior to the late 1970s, are comparatively reliable. And the minivan gets better gas mileage. Also, the fact that it’s a minivan means an adult can walk (sort of) to the back to separate quarreling kids, something my parents were unable to do as my brothers and I bickered our way across 800-plus miles of Texas.
Freeway speed limit: 55 in 1974, it’s now 70 or 80 on much of the I-10 and I-20 stretch that takes you from Arizona to Georgia.
Cruise control.
Cell phones. What a convenience to be able to chat with friends and relatives during the seemingly endless drive, or to get a listing of hotels in the next town and make a reservation at the last minute.
Portable DVD players. On our 1974 trip we listened to Robin Hood on a portable tape player. My kids now watch the video version. Both are fun, but videos are more entertaining and hold kids’ attention for longer stretches.
Music. In 1974 there were no CDs, iPods, or satellite radio.
Laptop computers.
The internet, and wireless access to it.
MapQuest (we don’t yet have GPS).
A number of fast-food restaurants now have enclosed play areas, helpful for letting kids blow off some steam.
Hotel breakfast. Each night one of my parents would drive to a grocery store to buy milk and cereal, then put the milk on ice, so that we could eat a quick inexpensive breakfast before heading out the next morning. Now we walk to the hotel lobby for breakfast and choose from a half-dozen cereals, pancakes, eggs, orange juice, coffee, and so on.
More public rest stops across the south seem to have shaded areas and clean restrooms.
It appears to me there’s less litter on highways these days.
Starbucks. A decade from now minivans may come equipped with an espresso maker in the dashboard. For now the availability of decent coffee at semi-regular intervals is a big help to those of us for whom conversation and music and breaking up kids’ squabbling isn’t quite sufficient to ensure constant alertness at the wheel.
For more on changes in quality of life, this book is a good place to start.
The Cost of Rising Inequality
April 27, 2008Income inequality in the U.S. has increased sharply in the past generation. Those who worry about this development do so partly on grounds of fairness and partly because inequality may have adverse effects on politics, health, and crime. Sometimes overlooked is a more immediate cost: slow income growth for a large chunk of the population.
The following chart shows average inflation-adjusted incomes in 1979 and 2005 for various groups of households: the bottom 20%, the lower-middle 20%, the middle 20%, the upper-middle 20%, the next 10%, the next 9%, and the top 1%. The incomes include government transfers and subtract taxes. The data, from the Congressional Budget Office (here), are the best available for this purpose.
The average income among all households rose at a rate of 1.5% per year over these two and a half decades. But as the chart makes plain, much of that increase went to households at the top of the distribution, especially those at the very top. Households in the bottom three quintiles experienced very slow income growth — 0.2% per year for the poorest quintile, 0.6% for the next, and 0.7% for the middle.
What would 2005 incomes have looked like if income growth had been proportionate rather than heavily skewed in favor of the top — in other words, if all incomes had increased at a pace of 1.5% per year? The dashed line in the next chart shows the answer. To make it easier to see the effect, I include only the bottom 80% of households here. All of them would have been a good bit better off.
It’s often said that progressives focus too much on the distribution of income and don’t pay enough attention to absolute income levels. In fact, its impact on absolute incomes is one of the chief reasons to be concerned about rising inequality.
Borrowing from the Nest Egg
February 28, 2008This news is discouraging, but hardly unexpected. According to a Marketplace report, a survey by the Transamerica Center for Retirement Studies (pdf here) finds that the share of workers borrowing from their 401(k) retirement funds increased from 11% in 2006 to 18% in 2007. Nearly half of those taking out such loans in 2007 cited the need to pay off debt, compared to a quarter in 2006.
Stagnant wages and salaries, most spouses already employed, rising health care and college tuition costs, higher mortgage debt loads, and falling home values mean lots of American households — including many middle-income ones — are pinched financially. The late 1990s economic boom lessened the strain for a while. Then home equity loans helped. More recently, credit card usage has jumped. Borrowing against retirement savings is the logical next step.
The Left, the Right, and Income Growth
February 17, 2008Which political party is better at improving living standards?
A commonplace view is that Democrats favor policies that boost the well-being of the poor while Republicans’ policy preferences are more conducive to economic growth and rising incomes. Debates about high vs. low taxes, generous vs. stingy social programs, and heavy vs. light regulation of business often are framed in terms of a tradeoff between compassion and growth. Should government do more to assist the poor? Or should it intervene less, thereby helping the economy to grow more rapidly?
For the most part this debate is a battle of rhetoric and assumptions. Many on the right assume that lower taxes, less regulation, and less generous social policies must be good for economic growth. Some on the left accept this assumption but argue that growth will fail to trickle down to the poor. Others dispute the assumption.
Evidence can help. There is a great deal of it that is potentially relevant. Here is one piece. Using tax records and surveys, the Congressional Budget Office has compiled good data on household incomes from 1979 through 2005 (here). The presidency was held by a Republican from 1981 to 1992, by a Democrat from 1993 to 2000, and by a Republican since 2000. The following chart shows average rates of income growth (adjusted for inflation and with taxes subtracted) for each of the five quintiles (fifths) of households during these three periods.
Income growth for each of these groups, from the poorest to the middle to the richest, has been faster during Democratic administrations than Republican ones.
Does this prove that Democrats are more effective than Republicans at promoting income growth? No. A government’s ability to affect income growth is limited, Democrats controlled one or both houses of Congress during Republican presidencies and vice-versa, and each of these periods has idiosyncratic features (see here, here, and here, for instance). Still, the data offer reason for skepticism about the notion that policies favored by the right are better at raising living standards.
Nor is this peculiar to the American context. Here is a counterpart chart showing income growth in the United Kingdom over the same period. The Conservative party held the government from 1979 to 1997; the Labour party has held it since. The data are from the Institute for Fiscal Studies (here).
Incomes of the richest fifth increased slightly more rapidly during the years of Conservative government, but most British households have fared as well or better under (New) Labour.
Size of the Pie, Distribution of the Pie
January 22, 2008“Today’s problems have less to do with the size of the economic pie than the way it is divided.” This, according to a New York Times article, is what Hillary Clinton’s economic advisers believe. I’m certain John Edwards’ economic team would agree with the statement, and I suspect Barack Obama’s would too.
Is this a sensible view? That’s a large question, but here is one way to think about it. The solid lines in the following chart show trends since World War II in inflation-adjusted incomes of families at the 60th, 40th, and 20th percentiles of the income distribution. The data are from the Census Bureau (here).
From 1947 to 1973, incomes at each of these three levels grew at an annual rate of about 2.7%. That was approximately the same as — actually slightly faster than — the rate of growth of the economy as a whole; GDP per capita during that period grew at a rate of 2.5% per year.
Since 1973 incomes in the middle and lower portion of the distribution have increased much less rapidly: 0.8% per year at the 60th percentile, 0.5% per year at the 40th, and just 0.3% per year at the 20th. Is this because the economy as a whole has failed to grow? No. The annual growth rate of per capita GDP since 1973 has been 1.9%. Instead, it’s because most of that economic growth has gone to those at the top of the distribution.
The dashed lines in the chart show what incomes at the 60th, 40th, and 20th percentiles would have looked like had they grown at the same 1.9%-per-year pace as the economy since 1973. The difference is striking. Incomes for a very large swath of the American population would be much higher — $15,000 to $30,000 higher — if economic growth since the mid-1970s had been distributed more equally.
Some will respond that the heavily skewed distribution of post-1973 economic growth contributed to that growth. In other words, the pie would now be smaller if those below the top had gotten more of it during the past generation. If you believe that, see this post.
